Forecast | Automation is the new outsourcing

In 2015, China, the world’s most populous country, experienced a shortage of blue-collar workers. Once, employers could recruit hordes of cheap workers from the countryside; now, employers compete over qualified workers, thereby raising the median wage of factory workers. To sidestep this trend, some Chinese employers have outsourced their production to cheaper South Asian labor markets, whereas others have opted to invest in a new, cheaper class of worker: Robots.

Automation has become the new outsourcing.

Machines replacing labor isn’t a new concept. Over the last three decades, human labor’s share of global output shrunk from 64 to 59 per cent. What’s new is how cheap, capable, and useful these new computers and robots have become when applied to the office and factory floors.

Put another way, our machines are becoming faster, smarter, and more proficient than us at almost every skill and task, and improving far faster than humans can evolve to match machine capabilities. Given this rising machine competency, what are the implications for our economy, our society, and even our beliefs around living a purposeful life?

Epic scale of job loss

According to a recent Oxford report, 47 per cent of today’s jobs will disappear, largely due to machine automation.

Of course, this job loss won’t happen overnight. Instead, it will come in waves over the next few decades. Increasingly capable robots and computer systems will begin consuming low-skilled, manual labor jobs, such as those in factories, delivery (see self-driving cars), and janitorial work. They will also go after the mid-skill jobs in areas like construction, retail, and agriculture. They will even go after the white-collar jobs in finance, accounting, computer science and more.

In some cases, entire professions will disappear; in others, technology will improve a worker’s productivity to a point where employers simply won’t need as many people as before to get the job done. This scenario where people lose their jobs due to industrial reorganization and technological change is referred to as structural unemployment.

Except for certain exceptions, no industry, field, or profession is entirely safe from the forward march of technology.

Who will be affected the most by automated unemployment?

Nowadays, the major you study in school, or even the specific profession you’re training for, oftentimes becomes outdated by the time you graduate.

This can lead to a vicious downward spiral where in order to keep up with labor market needs, you’ll need to constantly retrain for a new skill or degree. And without government assistance, constant retraining can lead to an enormous collection of student loan debt, which could then force you to work full-time hours to pay down. Working full-time without leaving time for further retraining will eventually make you obsolete in the labor market, and once a machine or computer finally does replace your job, you’ll be so behind skill-wise and so deep in debt that bankruptcy may be the only option left to survive.

Obviously, this is an extreme scenario. But it’s also a reality some people are facing today, and it’s a reality more and more people will face with each coming decade. For example, a recent report from the World Bank noted that 15 to 29-year-olds are at least twice as likely as adults to be unemployed. We’d need to create at least five million new jobs a month, or 600 million by the end of the decade, just to keep this ratio stable and in line with population growth.

Moreover, men (surprisingly enough) are more at risk of losing their jobs than women. Why? Because more men tend to work in low skilled or trades jobs that are actively being targeted for automation (think truck drivers being replaced by driverless trucks). Meanwhile, women tend to work more in offices or service-type work (like elderly care nurses), which will be among the last jobs to be replaced.

Will your job be eaten by robots?

If you’d prefer a lighter read and a slightly more user-friendly way to search the survivability of your future job, you can also check out this interactive guide from NPR’s Planet Money podcast: Will your job be done by a machine?

Forces driving future unemployment

Given the magnitude of this predicted job loss, it’s fair to ask what are the forces driving all this automation.

Labour. The first factor driving automation sounds familiar, especially since it’s been around since the start of the first industrial revolution: rising labor costs. In the modern context, rising minimum wages and an aging workforce (increasingly the case in Asia) have encouraged fiscally conservative shareholders to pressure their companies into cutting their operating costs, oftentimes through downsizing salaried employees.

But simply firing employees won’t make a company more profitable if said employees are actually needed to produce or serve the products or services the company sells. That’s where automation kicks in. Through an upfront investment in complex machines and software, companies can reduce their blue-collar workforce without jeopardizing their productivity. Robots don’t call in sick, are happy to work for free, and don’t mind working 24/7, including holidays.

Another labor challenge is the lack of qualified applicants. Today’s educational system is simply not producing enough STEM (Science, Technology, Engineering, Math) graduates and trades people to match market needs, meaning the few that do graduate can command exceedingly high salaries. This is pushing companies to invest in developing sophisticated software and robotics that can automate certain high-level tasks that STEM and trade workers would otherwise perform.

In a way, automation, and the explosion in productivity it generates, will have the effect of artificially increasing the labor supply—assuming we count humans and machines together in this argument. It will make labor abundant. And when an abundance of labor meets a limit stock of jobs, we end up in a situation of depressed wages and weakening labor unions.

Quality control. Automation also allows companies to gain better control over their quality standards, avoiding costs stemming from human error that can lead to production delays, product spoilage, and even lawsuits.

Security. After the Snowden revelations and increasingly regular hacking attacks (recall the Sony hack), governments and corporations are exploring new methods to protect their data by removing the human element from their security networks. By reducing the number of people who need access to sensitive files during normal daily operations, devastating security breaches can be reduced.

In terms of the military, countries around the world are investing heavily into automated defense systems, including aerial, land, sea, and submersible attack drones that can operate in swarms. Future battlefields will be fought using far fewer human soldiers. And governments who don’t invest in these automated defense technologies will find themselves at a tactical disadvantage against rivals.

Computing power. Since the 1970s, Moore’s Law has consistently delivered computers with exponentially increasing bean counting power. Today, these computers have developed to a point where they can handle, and even outperform, humans in a range of predefined tasks. As these computers continue to develop, they will allow companies to replace far more of their office and white-collar workers.

Machine power. Similar to the point above, the cost of sophisticated machinery (robots) has been decreasing steadily year-over-year. Where once it was cost prohibitive to replace your factory workers with machines, it’s now happening in manufacturing hubs from Germany to China. As these machines (capital) continue to drop in price, they will allow companies to replace more of their factory and blue-collar workers.

Rate of change. As outlined in chapter three of this Future of Work series, the rate at which industries, fields, and professions are being disrupted or made obsolete is now increasing more quickly than society can keep up.

From the general public’s perspective, this rate of change has become faster than their ability to retrain for tomorrow’s labor needs. From a corporate perspective, this rate of change is forcing companies to invest in automation or risk being disrupted out of business by a cocky startup.

Governments unable to save the jobless

Allowing automation to push millions into unemployment without a plan is a scenario that most definitely won’t end well. But if you think world governments have a plan for all of this, think again.

Government regulation is often years behind current technology and science. Just look at the inconsistent regulation, or lack thereof, around Uber as it expanded globally within just a few short years, severely disrupting the taxi industry. The same can be said of bitcoin today, as politicians have yet to decide how to effectively regulate this increasingly sophisticated and popular stateless digital currency. Then you have AirBnB, 3D printing, taxing e-commerce and the sharing economy, CRIPSR genetic manipulation—the list goes on.

Modern governments are used to a gradual rate of change, one where they can carefully assess, regulate, and monitor emerging industries and professions. But the rate at which new industries and professions are being created has left governments ill-equipped to react thoughtfully and in a timely manner—oftentimes because they lack the subject matter experts to properly understand and regulate said industries and professions.

That’s a big problem.

Remember, the number one priority of governments and politicians is to retain power. If hordes of their constituents are suddenly put out of a job, their general anger will force politicians to draft ham-fisted regulation that could heavily restrict or all out ban revolutionary technologies and services from being made available to the public. (Ironically, this government incompetence could protect the public from some forms of rapid automation, albeit temporarily.)

Let’s take a closer look at what governments will have to contend with.

Societal impact of job loss

Due to the heavy specter of automation, low- to medium-level jobs will see their wages and buying power remain stagnant, hollowing out the middle class, all while the excess profits of automation overwhelming flow towards those holding higher-tier jobs. This will lead to:

An increased disconnect between the rich and the poor as their quality of life and political views begin wildly diverging from each other;

Both sides living markedly apart from each other (a reflection of housing affordability);

A young generation devoid of substantial work experience and skill development facing a future of stunted lifetime earning potential as the new unemployable underclass;

Increased incidents of socialist protest movements, similar to the 99% or Tea Party movements;

A marked increase in populist and socialist governments sweeping into power;

Severe uprisings, riots, and coup attempts in less developed nations.

Economic impact of job loss

For centuries, productivity gains in human labor have traditionally been associated with economic and employment growth, but as computers and robots start replacing human labor en masse, this association will begin to decouple. And when it does, capitalism’s dirty little structural contradiction will be exposed.

Consider this: Early on, the automation trend will represent a boon for executives, businesses, and capital owners, as their share of company profits will grow thanks to their mechanized labor force (you know, instead of sharing said profits as wages to human employees). But as more and more industries and businesses make this transition, an unsettling reality will start to bubble up from under the surface: Who exactly is going to pay for the products and services these companies produce when most of the population is forced into unemployment? Hint: It ain’t the robots.

Timeline of decline

By the late 2030s, things will come to a boil. Here’s a timeline of the future labor market, a likely scenario given the trend lines seen as of 2016:

Automation of most current day, white-collar professions seeps through the world economy by the early 2030s. This includes a considerable downsizing of government employees.

Automation of most current day, blue-collar professions seeps through the world economy soon after. Note that due to the overwhelming numbers of blue-collar workers (as a voting block), politicians will actively protect these jobs through government subsidies and regulations far longer than white-collar jobs.

Throughout this process, average wages stagnate (and in some cases decline) due to the overabundance of labor supply compared to demand.

Moreover, waves of fully automated manufacturing factories begin popping up inside industrialized nations to cut down on shipping and labor costs. This process shutters overseas manufacturing centers and pushes millions of workers from developing countries out of work.

As the majority of workers are pushed out of traditional employment, and into the gig economy. Consumer spending starts to skew to a point where less than ten percent of the population accounts for nearly 50 per cent of consumer spending on products/services deemed as non-essentials. This leads to the gradual collapse of the mass market.

As income, payroll, and sales tax revenue begin drying up, many governments from industrialized countries will be forced to print money to cover the growing cost of unemployment insurance (EI) payments and other public services to the unemployed.

Developing countries will struggle from substantial declines in trade, foreign direct investment, and tourism. This will lead to widespread instability, including protests and possibly violent riots.

Governments also take steps to redesign policies around employment, education, taxation, and social program funding for the masses in an attempt to create a new status quo—a new New Deal.

Capitalism’s suicide pill

It may be surprising to learn, but the scenario above is how capitalism was originally designed to end—its ultimate triumph also being its undoing.

Okay, maybe some more context is needed here.

Without diving into an Adam Smith or Karl Marx quote-athon, know that corporate profits are traditionally generated by extracting surplus value from workers—i.e. paying workers less than their time is worth and profiting from the products or services they produce.

Capitalism incentivizes this process by encouraging owners to use their existing capital in the most efficient way by of driving down costs (labor) to produce the most profits. Historically, this has involved using slave labor, then heavily indebted salaried employees, and then outsourcing work to low-cost labor markets, and finally to where we are today: replacing human labor with heavy automation.

Again, labor automation is capitalism’s natural inclination. That’s why fighting against companies inadvertently automating themselves out of a consumer base will only delay the inevitable.

But what other options will governments have? Without income and sales taxes, can governments afford to function and serve the public at all? Can they allow themselves to be seen doing nothing as the general economy stops functioning?

Given this oncoming quandary, a radical solution will need to be implemented to resolve this structural contradiction—a solution covered in a later chapter of the Future of Work and Future of the Economy series.